Wednesday, January 10, 2007

The Sound of Bubbles Popping

EUR/USD 1.2994 Hi 1.3007 Low 1.2952
USD/JPY 119.17 Hi 119.51 Low 119.14
AUD/USD 0.7797 Hi 0.7816 Low 0.7786
EUR/JPY 154.85 Hi 155.28 Low 154.59

That noise you hear is the noise of a 1,000 Hedge Funds sucking in air through gritted teeth. Given that following the crowd has proved such a disastrous strategy, the market is now looking for contrarian ideas. And guess what? These contrarian ideas are ALL THE SAME. Here are three of the most common:

Idea No. 1: The USD might look weak, and the market is/was looking for it to crumble, but clever contrarians know that a global recession will see the USD outperform other major currencies.

Idea No. 2: As a result of Idea No. 1, and because we are faced with a recession and potentially DEFLATION, USD denominated Treasuries are a good long term bet.

Idea No. 3: GOLD will underperform other assets. The market is bullish, long and DEFLATION is looming. Plus the USD will rally (see Idea No. 1) taking the shine off GOLD.

Well good luck trying to figure out how it's supposed to work in the medium to long term. In the short term the USD is gaining support from short covering. We have not seen a resurgence in USD bullishness. There is still no reason to want to hold USDs or USD denominated assets in the long term unless you use USDs to pay your grocery bills.

The Treasury Market story looks like it is having slightly more trouble buying the Contrarian Story. U.S. Treasuries continue to see selling pressure. The U.S. Deficit is a BIG PROBLEM. What's more the U.S. Government wants to attract more offshore money so that it can finance more international conflict. Potentially this conflict will be nuclear and will be carried out by the U.S. Patsy in the Middle East: Israel. So far, so good. Cheney is practically beside himself with anticipation.

The one MAJOR problem with this little game plan is that the people who are supplying the cash are also the people who have already seen what Nuclear Bombs look like: the Japanese. They might not be so excited about the use to which the U.S. wishes to put their savings. So keep a very close eye on the USD/JPY. In terms of the U.S. Funding Requirement, the USD/JPY really is more important than Europe and the EUR/USD. The USD/JPY has been appreciating over the past year, mostly because of the CARRY TRADE, but should Hedge Funds be forced to square, should the BoJ go ahead and HIKE in January and should the Japanese take advantage of the current exchange rate to REPATRIATE FUNDS, then the USD/JPY could see a sharp reversal.

Meantime we do know what's on the agenda on U.S. Financial Markets for this year thanks to the recent release of the FEDERAL RESERVE "Minutes": NO EASING. The FED looked to one side and saw the high levels of Consumer Debt, Falling Housing Prices and struggling American Citizens and then looked to the other side and saw the Massive Government Funding Requirement and, guess what, the FED went with the Government Funding Requirement. The FED has decided that the Federal Government needs to keep USD denominated assets attractive to offshore investors. So sorry about all those guys we encouraged to take out floating rate mortgages at the bottom of the market and sorry about the fact that we didn't tighten up lending requirements or increase Reserve Requirements, like the Chinese just did (which means a decrease in lending but not necessarily an increase in interest rates) but we gotta try and protect the value of the USD for our Foreign Investors. Not that Foreign Investors are necessarily buying into this, but hey, we can't take any risks here. We'd like to help, we really would, but we got a Trade Deficit, a Current Account Deficit and a soaring Government Deficit to deal with. Our hands are tied. There's nothing we can do. You're on your own guys.

So it's good news all 'round. And if Global Stock Markets don't seem to see it that way, well too bad. And Global Stock Markets certainly seem to have started the year with a bit of a bang. The sort of bang you get when a very BIG BUBBLE POPS.

OIL 55.11
GOLD 611.50

Although the economic outlook hasn't dramatically worsened, (the economy has been bad for a while, just everyone was pretending) all the commodity bulls are suddenly getting slammed into the wall. And now the data out of Europe is starting to look clouded. That makes: the U.S.A., China and now Europe. How long before we officially declare a global economic "cooling"? Not long.

Accommodation is being removed everywhere. So the Commodity Correction could have a while to run before we're done. The creation of the Hedge Fund bubble (that is the Hudge Fund Industry) means that you could see selling pressure at absurd levels on the downside as stops are triggered, just like we saw buying pressure at crazy levels on the upside as short sellers were squeezed. I wonder what did happen to that Chinese trader who was caught massively short copper and squeezed as the market spiked? Expect more stories like that, only in reverse.

The GOLD price has fallen back as Commodity Markets got hit and the firmer tone of the USD has helped. But we haven't seen anything like the scale of panic driven selling we have seen in other Commodity Markets. The longer term outlook for GOLD depends on two things: confidence in the stability of Global Financial Markets and investor confidence in the USD in particular. Neither is guaranteed.

Strange goings on in the GEOPOLITICAL world together with the impact of warmer weather has taken the zing out of the OIL price. What Bush needs to do to get that price back up is start another war. So, together with his buddies in Saudi Arabia, using Israeli Air Power it appears that ANOTHER WAR is being planned. It involves an attack on Iran, by Israel, with nuclear bombs and U.S. and Saudi support. Just in time for Armageddon. Which reportedly is going to happen on December 21, 2012. It's nice to get these things lined up neatly. They'll tell you about the next war when they're good and ready. Oh and when there is no way to back out.

At any rate this new little plan for attacking Iran, and the strange alliance between Israel and Saudi Arabia that this involves, has shown how quickly the Palestine issue could be solved with the right incentives. Israel is releasing Palestinian funds, prisoners and calling for: "bygones to be bygones". So this intractable problem is suddenly over? Oh yes. Funny what can be achieved when you really put your mind to it. And so quickly too. Not that the International Press is pondering the issue or the bizarre swiftness with which that particular conflict was resolved. Things move on.

But don't worry we have another bigger and better conflict coming your way soon. The attack on Iran could really get things going. You know how it is? War is so profitable. Cheney really is beside himself with joy. Or whatever passes for joy at his house.

Sometimes it seems that the Conspiracy Theorists really are onto something.

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